The war in Ukraine has had a significant impact on the global oil market, with Russian flagship Urals oil now selling at a premium to the Brent international benchmark in Indian ports for the first time ever. This shift is largely due to rising demand from India, which has been driven by the ongoing conflict in Iran. The Strait of Hormuz, a critical shipping route for global oil, has been choked by the U.S.-Israeli war against Iran, leading to increased pressure on alternative suppliers like Russia.
Russian oil had previously traded at a discount of several U.S. dollars per barrel to Brent in Indian ports since the start of conflict in Ukraine in 2022. However, with the EU's embargo on Russian sales and Russia diverting oil exports to Asia, Indian refiners have relied heavily on Russian oil as feedstock. This has created a significant demand for Russian Urals, which is now driving up prices.
The Kremlin has confirmed that the war in Iran has fueled a significant increase in demand for Russian oil and gas. As a result, traders are selling Russian Urals to India at a premium of $4-$5 per barrel to Brent on a delivered basis upon arrival at Indian ports in March and early April. This marks a significant shift in the market, with Russian oil now commanding a premium price.
The discount for Russian Urals in the Russian Baltic Sea port of Primorsk has narrowed by some $5 per barrel to around $20 per barrel on the FOB (free on board) basis. However, while Brent prices rose 25% in the past week to $89 per barrel, Russian Urals oil effectively rose 50% to $68.6 from $45.7 per barrel on an FOB basis in Primorsk.
Urals oil is now above the G7 price cap of $60 per barrel at the port of loading for the first time since last July and is also above the fresh EU price cap of $44.10 per barrel, according to LSEG data. This means that sellers of Russian oil above those caps cannot use Western shipping services and insurance.
The increased demand for Russian oil has led to rising freight costs, with traders estimating it now costs around $15 million to charter an Aframax vessel to carry oil from Russian Baltic ports to India. This is a significant increase from around $10 million-$12 million in February.
Freight costs for cargoes loading from the Russian Black Sea port of Novorossiysk are lower than at Baltic ports, with traders estimating it now costs $13 million to load cargo from this port. However, the discount for Russian Urals loading from Novorossiysk on an FOB basis for India has risen to $14 per barrel versus dated Brent.
The increased demand for Russian oil is a significant development in the global energy market, with implications for both producers and consumers. As the conflict in Iran continues to drive up prices, it remains to be seen how long this trend will persist.
Overall, the shift in the Indian market towards Russian Urals oil highlights the ongoing impact of global conflicts on the energy sector. With rising demand and increasing freight costs, it is likely that prices for Russian oil will continue to rise in the coming weeks.
